Over 100 handset brands in a $15 billion market makes a classic recipe for alliances

Some 220 mn units of feature & smartphones are sold in India per year. With over 100 handset brands in a $15-bn market, consolidation is just around the corner.Shelley Singh | ET Bureau | March 23, 2017, 09:13 IST

(Thinkstock Images)You may not have heard of Dakele or Eton or K-touch but, till three years ago, they were among some 500 smartphone brands jostling for a slice of the ample Chinese mobile phone market. By 2016, that number may have come down to 100 and among the casualties were Dakele, Eton and K-touch, which had become China’s no. 3 mobile phone vendor after Nokia and Motorola in 2009. According to a March 2016 report in South China Morning Post, the three Chinese smartphone makers had suspended operations amid fierce competition, low profits and unsettled debt.

A similar scenario is waiting to play out in the world’s second largest mobile handset market after China that’s estimated to be worth $15 billion. It’s the sheer size of the market — some 220 million units of smartphone and feature phones are sold in a year in India — that’s tempting new players to take the plunge, even as some old ones bite the dust. So if you have Bollywood icon Salman Khan readying plans to launch a BeingSmart range of phones — an extension of sorts of his Being Human apparel range — one-time leader Nokia will make a comeback with a 2G feature phone and three smartphones to be launched by June.

The Chinese juggernaut continues to rumble, led by top labels such as Xiaomi, Gionee, Vivo and Oppo, with a protracted tail comprising lesser known brands such as Huachin, Longcheer, Konka. Many more, including K-Touch, are watching from the sidelines and contemplating if it is worth stepping on to the crowded field. Together, these obscure brands control a 46% share of the Indian handset market.

But fortune is fickle and several brands — LeEco, Miezu and Celkon — with pan India ambitions have had to scale back or exit. Celkon wanted a pan India footprint but has been unable to make a dent outside southern pockets. Smaller cities such as Jaipur, Udaipur, Vijaywada and Visakhapatanam have their own local flavours.

Often started by former distributors, who “know the supply chain and market,” brands with alluring names like Kool, Sunny and Vijay keep popping up and disappearing—much like frequently installed and deleted apps. Pan India brands such as Micromax and Karbonn that once looked set to challenge the leaders find themselves swamped by competition. Karbonn has exited the Rs 10,000-plus category to focus on mass market models up to Rs 7,000 while Micromax is betting on cheaper models, hoping to ride on demand generated by Reliance Jio Infocomm’s offer of free voice for life. Micromax, till recently second in the pecking order, does not count among the top five smartphone brands.

Jaideep Mehta, managing director, IDC, India & South Asia, said, “Players that were strong three years ago have fallen off the volumes charts. Karbonn, at one point, looked like threatening Samsung’s hegemony but is now a niche player. Recently, a Chinese brand that spent Rs 80 crore a month on advertising exited, unable to convert ads to sales. Innumerable traders (lift-ship-andsell models) have burnt their fingers.”

New labels keep showing up. Part of the reason for the plethora, apart from the huge market, is that you can simply place an order for shipment over the phone. Not surprisingly, employees in the trade keen to make a fast buck see entrepreneurial hopes in selling handsets.

Original design manufacturers (ODMs) in China will be happy to ship phones on any given specs and there are all types. For instance, there are ODMs that won’t accept orders below a quarter million handsets and others that will make just 10,000 units of a device on order. The latter cater to the local players looking to a make a fast buck.

Such fly-by-night businesses — called trading models in market parlance — have limited shelf life. Sudhin Mathur, managing director, Motorola Mobility & Lenovo MBG India, said, “They are not the ones that will survive.” Dinkar Ayilavarapu, partner at Bain and Company, believes such players are not significant any more. “You need inhouse R&D, new models, a service network and innovation to survive. Even small-town buyers are getting educated about brands, which makes it tough for traders to survive.”

Yet, many keep coming as the sub-Rs 10,000 market accounts for bulk of the purchases and is a commodity play — little innovation, just a cheap handset that meets basic communication and messaging needs. Recently, Taiwan’s HTC exited this segment to focus on the high end. Faisal Siddiqui, president, HTC South Asia, said, “We were never into feature phones and never played strongly in the sub-Rs 10,000 market. We sell between Rs 12,000 and Rs 20,000 with innovation as the key.”

HTC also makes Google Pixel devices, which, at the high end, compete with Apple and Samsung brands like S7 Edge. Ayilavarapu reckons that 190 million out of 220 million handsets sold are below Rs 10,000. At the entry level, Itel of China offers devices for as low as Rs 700 while almost 100 companies would be vying for a share in this segment—most betting on feature phones (See graphic on feature phones to smartphones shift).

But to sustain business and break even, “companies need to sell at least one lakh devices a month, not an easy ask for a trader who doesn’t want to spend on marketing, distribution or aftersales service,” said MS Malik, managing director, Pacetel Systems, a telecom distribution firm. Small traders depend on selling via local TV channels rather than a formal distribution route that can be more expensive (See online-offline distribution graphic).

CONSOLIDATION AHEAD

Manu Jain, managing director, Xiaomi India, said, “About eight years ago, the China smartphone market was similar to where India is now. The Chinese market has consolidated, with the top 6-7 players accounting for an 80% share. In India too, there will be consolidation.”

For this, M&As are unlikely but outright exits expected. Shashin Devsare, executive director, Karbonn Mobile said, “Companies that don’t sell at least one million devices a year will be pushed out.” He believes there are 85 smartphone brands and over 150 in feature phones. “Those that don’t differentiate and neither have deep pockets to sustain will hit a dead end.” Karbonn itself has had to rejig strategy by getting out of the fiercer Rs 10,000-plus category to focus on below Rs 7,000 phones. At the beginning of 2016, Karbonn was selling about one million handsets a month; that number has now halved.

While the fragmented market makes it a slog for all players, Indian brands particularly have found the Rs 10,000-plus segment difficult to crack. "Most brands are copycats.

When you copy, the quality is not as good as the original,” said Malik. Often the only difference is the camera resolution. “They don’t invest in R&D, which can be at least 25% of the capital expenditure,” Malik said. That’s unlike most Chinese, Korean and Taiwanese brands that have their own design, R&D and manufacturing. Gionee has a 1,600-strong R&D team while Xiaomi has inhouse R&D and a network of 300 service centres, besides call centres to answer queries. Lenovo has 14 models at any given time in the Rs 4,500-40,000 bracket. “It’s an unforgiving market. If you don’t have a new product every few months, buyers will switch to any of the other brands,” said Mathur.

In the past, lack of innovation has brought global majors Nokia and Blackberry to their knees. Nokia is now trying to make a comeback. Ajey Mehta, vice-president at HMD India, which has licenced the Nokia brand, said, “We are banking on partnerships with Google, Foxconn and Nokia, which should help us in a market with undifferentiated products.”

Foxconn makes the phone while Google ensures a rich Android experience. Recently, at the World Mobile Congress in Barcelona, Finlandheadquartered HMD Global showcased a new-look Nokia 3310 2G feature phone, in addition to a clutch of smartphones. Whether Nokia can still be adept at ‘connecting people’ now depends on how many young Indian consumers recall the brand — or its slogan.

Redeeming Features

Loaded feature phones have slowed shift to smartphones

India is the world’s largest feature phone market and will remain so for a while. This despite several brands, including HTC, Gionee and Lenovo offering only smartphones. Arvind Vohra, MD, Gionee India blames it on lack of internet education of buyers. “The first device for many buyers continues to be a feature phone.”

While cheaper feature phones account for about 140 million units a year sales in the 220-million devices market, by value, it’s the smartphones that score—almost $12.5 billion to the $2.5-billion feature phone sales. In fact, the `15,000-25,000 market — entirely smartphones — has doubled in the past year, accounting for 35% share of all smartphones sold.

With 4G’s arrival and a data pricing war triggered by Reliance Jio Infocomm, you would expect smarter devices to fly off the shelves. Not quite. The pace of the shift to smartphones has slowed after the initial burst in 2013, when feature phones comprised 85% of the market; that’s now down to 55%.

In developed markets such as China and Europe, feature phones account for less than 15% of the total (in China, it’s less than 10% and now most manufacturers have stopped selling feature phones there). Dinkar Ayilavarapu, partner, Bain and Company, says, “It will take eight to 10 years for India to be a 100% smartphone market.

It’s a scenario that’s much like CRTs (the bulky TVs), which continued in India long after they stopped selling around the world. In a few years, it won’t be viable to produce feature phones; that could be a turning point.” The government’s push for digital payments and Aadhaar-enabled services could also accelerate the shift to smartphones.

Sudhin Mathur of Lenovo’s mobile business group is optimistic smartphones will dominate in three years. Manu Jain, MD, Xiaomi India, believes 90% of phones sold will be smartphones in five years. Sky Li, president, Oppo India, believes lack of connectivity is also delaying the shift. “While affordability does contribute a lot to high usage of feature phones, it is not the sole reason. Several corners of the country are still facing connectivity issues,” Li points out.

Jaideep Mehta, MD, IDC, India & South Asia, sees feature phones themselves getting smarter and a possible blurring of the line between feature and smartphones. “There’s lot of functionality being built into feature phones, like minimal browsing and enabling payments.” There are feature phones that run on 4G SIMs, trying to upgrade to smart category. As component prices drop and manufacturers can pack more in cheaper phones, feature phones could morph quickly into smartphones.

Online or Offline? It’s A Fine Line

Online accounts for a fourth of handset sales and could go up to half by 2020

About five years ago, online sales of smartphones comprised less than 5% of all sales, as consumers preferred to touch and feel before buying. That changed with brands such as Xiaomi, Google Pixel, Motorola and OnePlus selling online only. Today, 25-30% of 220 million units are sold online annually and this could up to 50% by 2020. Most recent launches have been online only as companies save costs and test market reaction. These include Nubia Z11 Mini S, Xiaomi Redmi 4A, Moto E3.

Manu Jain, MD, Xiaomi India, says,“Offline distribution and marketing costs are high — the device ends up being 20% dearer for the buyer.” National, state and city distributors each pocket 2-5% of handset cost and the retailer margin is 5-8%. Xiaomi claims almost a third of the share of online sales and some 10% of the overall smartphone pie. Lenovo claims two-thirds of its sales come from offline channels. Sudhin Mathur of Lenovo says, “Shoppers who are more aware come online.”

However, HTC of Taiwan sells only offline. “80% of the market is offline. Why go after the smaller pie?” asks Faisal Siddiqui, president, HTC South Asia. Xiaomi claims it can derive more bang for the buck by saving on distribution costs. But its planning to increase its offline presence this year. “We will sell more offline, but online will still comprise 70-75% of our sales,” says Jain.

Dinkar Ayilavarapu, partner Bain & Company, says distribution strategy depends on the strength of the brand. “It’s an overcrowded market. How you execute the go-to-market strategy is critical for survival. New brands entering now will compete with at least 50 other brands, Online selling is cheaper to test the market. Brands will go offline only when they see consumer response.”

Even Salman Khan doesn’t want to take chances and is reportedly going online first for the ‘Being Smart’ range of Android phones, shipped from factories in China and targeted at the mid-market (Rs 12,000 -20,000). Will that keep the box office ringing?

Innovators and the Me-toos

R&D spend will differentiate the quick from the dead

Apple and Samsung top the charts in mobile phone R&D spends, figuring among the world’s top 20 spenders on innovation. What comes out of the labs is critical to market share in smartphones where shoppers can ditch brands that aren’t futuristic enough.

Lessons that the once fancied Nokia and Blackberry learnt the hard way. In the long term, the smartphone could morph into an augmented reality machine, helping you see more than what your eyes can at any location. Smartphone could control your car, or be a 24x7 assistant, with tghe ability to respond to your thoughts! That may sound outlandish but that’s what geeks hope all the f a ster process -ing and number crunching capabilities can help achieve.

However, in the nearer term, manufacturers are grappling with more mundane issues that will help them get a better market share. Innovation focus is on longer lasting batteries, better selfie experience, better cameras and foldable screens. The last one will alllow users to expand the five-inch screen to an eight inch one, helping them do more.

HTC focuses a lot on audio innovation, apart from cameras and design. Lenovo offers options of modular technology phones—users can attach JBL speakers and a Hasselblad camera as separate modules. Indian companies, however, are yet to make a mark on the innovation scale, preferring reliable mass market models than cutting edge. Says a market expert who wished not to be named, “R&D costs are 22-25% of capital expenditure. Not many companies are willing to spend that kind of money as margins are thin. That’s why cool innovation is seen mainly in models that sell above `20,000. The rest are popular, copy cats, banking on rivals ideas.”